Pakistan cuts interest rates to lowest in almost three years: Bloomberg

KARACHI: Pakistan cut its benchmark interest rate to the lowest in almost three years as cooling inflation provides space for policymakers to bolster growth.

The State Bank of Pakistan lowered the target rate by 100 basis points to 12%, Governor Jameel Ahmad said in Karachi on Monday. All the 20 economists surveyed by Bloomberg predicted the move, with 17 forecasting the exact measure.

Inflation has declined in the last few months and the trend is expected to continue in January, the governor said at a briefing announcing the decision. “A cautious monetary policy stance is needed to ensure price stability, which is essential for sustainable economic growth,” the central bank said in a statement on its website.

Pakistan’s inflation rate has dropped to single digits in the last few months after hitting an all-time high of 38 percent in May 2023. However, core inflation, that excludes volatile food and fuel prices, will remain elevated, the governor said.

The inflation outlook is subject to risks from global commodity prices, protectionist policies in major economies and energy price hikes, the central bank said.

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The South Asian nation’s economy expanded slower-than-expected in the July-September period as industrial production remained weak. Authorities have bene working to turnaround the economy and implement the International Monetary Fund-mandated reforms that include higher taxes and lower subsidies.

What Bloomberg Economists says: The State Bank of Pakistan’s rate cut on January 27 should boost growth, which is being damped by still-high real interest rates and a contractionary fiscal policy. Looking ahead, we expect the SBP to stay on hold through December as inflation is set to pick up again in coming months. Any further easing could push real rates below the historical average – pressuring the balance of payments and hurting the rupee.

The $7 billion bailout from the IMF and loans from friendly countries have helped Pakistan avert a potential default and steer the economy toward stability. Moody’s and Fitch last year upgraded the nation’s sovereign rating, citing improvement in its external finances.